Rare is the year that goes by without reports of a flood or drought somewhere in China. But without a more specific sense of place and context, it’s hard to evaluate the significance of such calamities, or their impact on business and the economy. The “Nine Nations of China” framework can often be helpful in getting a handle on the situation.

The part of China most often afflicted by both flood and drought is the Yellow Land, an arid, densely populated region dependent on the turgid and unpredictable Yellow River for its water supply. The news these past few weeks, however, has been dominated by reports of a devastating drought affecting an entirely different area, the southwest provinces of Yunnan, Guizhou, and Guangxi — the region I call “Shangri-La.” Those who have read my description of Shangri-La may recall my mentioning, among its key resources, its plentiful supplies of water. Normally that’s true, but this year is different.

According to news reports, Shangri-La has gotten barely a drop of rain since September — over seven months. It’s worth keeping in mind, of course, that even in normal years, China is not like temperate regions in Europe or North America, which receive relatively even rainfall all year round. All of China, the north as well as the south, is affected by the monsoon, with a rainy season (the summer) and a dry season (the winter and spring). For instance, the city of Kunming, in the center of Shangri-La’s drought zone, averages more than 8 inches (20cm) of rain in July and August — as much as a tropical rainforest. Even in the winter, though, it typically gets at least half an inch a month, and 3-4 inches per month in the fall. Yunnan province’s name, which means “south of the clouds,” reflects the region’s reputation for having a moist, misty climate throughout the year.

Although some have been quick to blame this year’s drought on global warming, imperial records indicate that normally lush Shangri-La has, in fact, suffered severe droughts periodically throughout history (76 out of the 691 years from 1300 to 1991, to be precise). Though rare — or perhaps because they are so rare — these periods can wreak havoc on the region’s fragile economy.

Shangri-La is the poorest of China’s “nine nations,” and highly dependent on the crops it can grow in its usually nourishing environment. 400 cities, with over 20 million people, are already facing shortages of drinking water. But that’s merely an inconvenience, compared to the effect on farmers. Over 11 million livestock are going thirsty. The region’s tobacco crop (it’s main source of cash) and corn crop (it’s main source of subsistence) are planted in May — before the monsoon — but that may prove impossible this year. Almost 5 million hectares are affected. Farmers who can’t plant crops may have to migrate to find jobs to support their families.

The drought is already having an effect on some of Shangri-La’s other important cash crops. China’s rubber industry, based in southern Yunnan, has virtually ceased production due to water shortages. Thailand, the world’s largest rubber exporter, which lies downstream and receives its water from Shangri-La’s rivers, is also severely affected. As a result, Bloomberg reported Monday that global rubber prices have hit a 20-month high. Chinese tire makers, mainly located in the Back Door and the Metropolis, are seeing their margins evaporate. Already hit hard by U.S. tariffs, they face rubber prices that have risen to $3,633 per ton, more than double the price at the beginning of this year, and have been forced to start raising their own prices.

The flower business has also been hit hard. As I’ve noted in the past, Shangri-La is a major producer of fresh cut flowers, its #2 export after tobacco. Yunnan alone supplies over 80% of China’s flowers. This year, about 31,000 hectares, over 80% of Yunnan’s flower fields, are short of irrigation, hurting both quantity and quality of flowers produced, and causing $125 million in direct economic losses to the sector. Tens of thousands of small farmers in certain districts, like Chenggong County outside of Kunming, depend entirely on planting flowers for their income. “This is the first time the flower industry in Yunnan has suffered such a big blow,” according to Li Ban, manager of the Dounan Flower Market, Asia’s largest. Last year the market sold nearly 3 million flowers a day at its peak season, but this year daily sales have fallen to 1.4 million. Due to short supply, flower prices in many Chinese cities, such as Shanghai, have doubled. The price of baby’s-breath, for instance, has recently risen from 10 yuan/kg to 30.

In a previous post, I mentioned that global corporations like Starbucks, Nestle, and Maxwell have been investing in Shangri-La’s nascent coffee-growing industry. According to China Daily, coffee is now Yunnan’s third largest export, behind tobacco and flowers. But Hu Lu, deputy secretary general of the Coffee Association of Yunnan, says that “the drought will not only bring down the province’s coffee production in 2009 and 2010, but also have long-term effects on the coffee industry.” The coffee harvest season began in October and ended in March, with the drought affecting the entire period. “The continuous drought will hurt coffee trees and they might die of thirst, and then coffee growers will not have another harvest for five or six years,” Hu said. Plans to increase coffee production next year are unlikely to be realized, and output may even drop. Unlike rubber and flowers, where shortages have resulted in higher prices, global buyers like Starbucks can turn to other places to purchase their coffee beans, leaving local producers to sell their diminished yield at the same low prices. China’s highly prized Pu’er tea, on the other hand, which is grown in some of the same locations, has been rising in price due to the drought’s effect on production.

Even power generation has been affected by the drought. Shangri-La relies heavily on hydropower generated from dams along the region’s raging rivers, which carve steep paths through its mountainous terrain. With their flow reduced, less power can be generated, both in Shangri-La itself, and downstream at the Three Gorges Dam (located in the Crossroads), where the dam’s reservoir has fallen six meters from a year before. Xinhua news service reports that “300,000 tonnes of thermal coal was needed to plug a shortage in Hubei [in the Crossroads] estimated at 500 million kilowatts/hour due to a severe cut in hydropower, which supplies 30 percent of the province’s needs.” The article mentions that power shortages are also affecting the export hub of Guangdong, in the Back Door.

Those dams and reservoirs along Shangri-La’s mighty rivers are of interest to more than just the Chinese. The topic has been front and center in the first big summit of the Mekong River Commission (MRC), taking place this week in Thailand. The Mekong is one of several major rivers that flow through Shangri-La and provide Southeast Asia with much of its water. In particular, the Mekong supports the rich fishing grounds of Tongle Sap (Great Lake) in Cambodia, and the fertile rice paddies of the delta in southern Vietnam, both of which feed millions. China’s drought is having a big impact downstream, and several neighboring countries are blaming upstream Chinese dams for restricting what little flow there is left. Four Chinese dams have been completed, and another four are under construction or planned, and they’ve been a source of concern in Southeast Asia for years. But the drought — and historically low water levels on the lower Mekong (the lowest in 50 years) — have brought those concerns to head. The MRC’s executive director, Jeremy Bird, has defended China, saying that downstream water shortages are due to natural causes (reduced rainfall), not the dams. But the controversy is likely to stir further debate about China’s role in Southeast Asia, and the impact further efforts to harness Shangri-La’s water resources will have on its neighbors.

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I curious as to what you might see as knock-on effects for China beyond increased prices for a few products such as flowers, some farmers becoming migrant workers, and possible tensions with other MRC members.